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1 Insurance International expansion and Australia-based insurers: The race is on

2 Australia s insurance markets are tough due to their mature and competitive nature. However, they also boast stability and a population of affluent and sophisticated consumers with significant needs for general insurance, life insurance, superannuation and savings products. The global financial crisis (GFC) has rewritten the rule book for the industry. Australian based insurers now face a period of subdued growth and uncertain investment returns, which is driving them to look to overseas markets to bolster their performance. At the same time, Australia s affluent market and western business practices makes it an attractive market for overseas insurers from other developed markets seeking to create a foothold in Asia Pacific, and to Asian insurers seeking to further diversify their portfolios. Accenture s new survey highlights how two challenges: the need to expand internationally and the need to shore up local positions, will be critical to success the in the new normal post-gfc market conditions. Our Global Multi-Country Operating Model Survey of senior executives at over 100 insurers worldwide, entitled How Internationalization Drives High Performance for Insurers in Uncertain Times was conducted in April It found more than three-quarters of respondents rated international expansion as a critical or important driver of economic value. At a time when the GFC has hammered the global industry, such a drive to find new engines for growth is to be expected. What the survey highlights, however, is the need for speed for companies to take advantage of current opportunities before their competitors, and the issues likely to surface in the drive for geographic expansion. 2

3 The three major findings from the survey are: 1. The financial crisis offers increased opportunity for international expansion, with most insurers planning to do so in the twelve months. The BRIC countries of Brazil, Russia, India and China as well as South Korea are a major focus among life insurers. P&C insurers are looking to emerging markets as well, but are also interested in Western Europe. Across both sectors, the drivers for international expansion were consistent: to spread risk and balance business cycles, manage costs more efficiently and take advantage of attractive stock prices. Develop requisite local market knowledge Execute the expansion plan and realize the business case. 3. Insurers will pursue greater global integration to manage operations across several countries and/or regions. In most cases, the multi-country operating models created from expansion activities have not delivered the benefits expected. More than four in five insurers said that to make their international expansion more efficient, they are undertaking or plan to implement changes to their back-office capabilities and information technology. 2. The vast majority of respondents recognized that their ability to realize the value of expansion was entirely dependent on their internal capabilities to: Build a viable business case in the current climate Accurately assess risk 3

4 Australia-specific findings Respondents at Australia-based insurers were most interested in expanding into the BRIC countries and other emerging Asian markets. They also had an above-average focus on using multi-country operating models to improve IT application and infrastructure costs. In comparison, other respondents were most interested in these models to refine business operation costs and improve their time to market. Australia-based insurers were bullish about the opportunities arising from the current financial and economic turmoil, particularly in terms of exploiting attractive pricing for M&A. While local executives shared most of the overall respondent s concerns about the challenges of international growth, they were particularly worried about having adequate leadership and management skills, and overcoming cultural gaps. These findings suggest that Australian companies appreciate the bargain-hunting opportunities presented by the GFC, but clearly recognize it will be the quality of leadership, management and other capabilities which will determine success in the long run. Implications for local insurers Historically, Australian insurers have a mixed history internationally. A small number of firms have successfully built up international networks, whilst others have entered then withdrawn from foreign markets sometimes at a considerable loss. A standout is QBE Insurance Group, which after three decades of international growth derives about 80 percent of its gross written premiums (GWP) outside of Australia 1 and ranks among the top 25 insurers in the world. Insurance Australia Group (IAG) has built a substantial presence in Asia Pacific and expects its Thailand, Malaysia and India businesses to grow faster than the Group as a whole and to deliver strong profits. 2 Others such as AMP Capital Investors are finding innovative ways to build their business in offshore insurance markets, without developing a retail network. These lessons simply support the argument for having access to the right capabilities needed to execute to plan. Australia has also proven to be an effective part of global networks for foreign insurers, from AXA to Zurich. As a mature and sophisticated English-speaking market located in Asia Pacific and with special attributes such as the superannuation guarantee, compulsory and third party motor insurance, Australia can be expected to remain an important 4

5 About the right operating model What best describes your current operating model across different geographies/contries? What model do you plan to use in the next 3 years? What benefits have been achieved from the implementation of your multi-country operating model? International ( Columbus model) Highly centralized operations based in home country with limited end customer offering localization 2009 current model 2012 expectation 13% 13% Regional ( Hubbing model) View on benefits achieved Reduction of business operations costs Reduction of IT applications and infrastructure costs Shared support services at regional level with a balance between localization of offerings and efficiency of supporting operations 2009 current model 2012 expectation 55% 50% View on benefits achieved Reduction of business operations costs Reduction of IT applications and and infrastructure costs Multi-National ( Mini-me model) Highly decentralized operations with strong localization around offerings 2009 current model 2012 expectation 19% 17% Globally Integrated ( One World model) Globally integrated operations: strategy, management and operations handled as a single globally integrated entity 2009 current model 2012 expectation 13% 20% View on benefits achieved Reduction of business operations costs Reduction of IT applications and and infrastructure costs View on benefits achieved Reduction of business operations costs Reduction of IT applications and infrastructure costs Limited impact Moderate impact Important impact Very important impact element in many insurers plans. There are some notable exceptions, such as Aviva s exit from the Australian market in mid Why go now? With general insurance growing slower than GDP, Australia is a particularly challenging market at present. For the three major Australian-owned insurers, for example, net profit margins, return on equity, return on capital, operating margins and return on assets have all trended down over the past 2 3 years. Expense and loss ratios are up, despite some overall growth in net premium revenues. The silver lining is that insurers in many other markets are also under pressure, which is forcing sales and divestitures and creating opportunities for Australia s relatively strong companies. This has not been lost on organizations such as QBE, which has been reported as looking to grow GWP by up to A$750 million over the next year, primarily through acquisitions in Europe. 3 Whilst shoring up local operations and ensuring they are delivering sound results, insurers looking overseas face a number of issues: Among the first order issues are: Where to expand to? How to enter JV or acquisition? In respect to execution and implementation: How do I build the requisite local market knowledge? How do I execute the entry strategy on the ground? How do I make this repeatable for future expansion? Multi-country models These are not insignificant questions. However, they all point to the issue of what operating model best suits the expansion plan? Accenture s survey addressed this specifically by asking respondents about their preferred model for multicountry operations. From this we identified four operating models that companies might adopt: Increasingly we expect internationalization to result in a bias for hubbing or integrated models. However, these call for operational capabilities which facilitate sharing of resources as a way of achieving standardization and lowering costs. Specifically, respondents identified the need to drive more cost out of IT and enterprise services via the multi-country strategy, but doing this across Asia or within China or India, for example, is no simple task. This view was backed up by the respondents who consistently ranked availability of leadership and management resources as a critical factor in execution. 5

6 Conclusion: Grasping the challenge and opportunity The survey showed that the race to internationalize is on, and that Australian companies should be planning for not only geographic expansion, but also to defend their home markets from new entrants. Success will depend on a just a few key execution capabilities: Having access to leadership and management talent in target countries Having a clear view of the operating model they wish to adopt Leveraging IT and enterprise services to realize cost synergies of multi-country operations Being able to execute on the ground. How Accenture can help Accenture s global insurance practice supports the multi-country business operations of many of the world s global and regional insurers. These include providing a China-based IT services hub for a global insurer, and supporting a UK based global insurer s global policy, claims and IT service out of India. We also assist companies seeking to grow their geographic footprints in Asia by helping define new operating models; executing market-entry strategies via M&A or providing outsourced services on a green-field basis, and providing IT assets to kickstart new country operations. As Australian insurers consider the future, it is clear being able to source the execution capability in sufficient volume, at home and in the target country, will be vital to success. 6

8 Copyright 2009 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. Contacts D. Glenn Sedgwick Managing Director Asia Pacific Insurance Andrew Parton Head of Insurance, Accenture Australia About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended Aug. 31, Its home page is

How international expansion is a driver of performance for insurers in uncertain times Accenture Global Multi-Country Operating Model Survey May 2009 Copyright 2009 Accenture. All rights reserved. Accenture,

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